- Vaccine development to driver EUR/USD value in 2021
- Short-term neutral, long-term Bullish - Julius Baer
- BofA see 2021 range of 1.20-1.25
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- EUR/USD spot rate at time of writing: 1.1979
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The Euro-to-Dollar exchange rate enters the final month of 2021 by knocking on the door of the psychologically significant 1.20 area, however analysts at two investment banks we follow say patience is urged and that a concerted move above 1.20 is still a story for 2021.
"The short-term outlook for EUR/USD is still burdened with some uncertainty as the second wave of the corona pandemic remains a threat to the economic recovery," says David Kohl, Chief Economist at Julius Baer.
The Euro has risen through the course of November, going from a low at 1.16 to reach a high at 1.20 on Monday Dec. 01.
The 1.20 barrier was tested once in September, but a subsequent failure here lead to a retreat and subsequent consolidation period.
Analysts at Bank of America (BofA) have told clients in a recent foreign exchange outlook briefing that a break above 1.20 would be premature, for now at least.
"We expect a decline in EUR/USD into end-year," says Ben Randol, an economist with Bank of America. "An uptick in market volatility consistent with increasing cyclical risks and lack of policy support appears a necessary condition for a near-term USD rally."
Randol's colleague at BofA, Athanasios Vamvakidis, says in the short term the 2nd Covid wave to lead to another dip in the global economy which will likely weigh on the euro's recovery potential relative to the dollar.
But for both Julius Baer and Bank of America, the development and rollout of a covid-19 vaccine will have a significant bearing on the dollar and euro as we move through 2021.
"The progress in developing a vaccine improves the longer-term prospects of an economic recovery and the outlook for EUR/USD," says Kohl.
Three vaccines have shown efficacy in stage three trials, and a rollout could commence in days with UK authorities tipped to approve the Pfizer candidate. U.S. medical authorities will consider the same vaccine on December 10 with the Moderna candidate due for review on December 17.
Above: EUR/USD daily chart showing price action in 2020.
The speed and successful rollout of the vaccine in December could be a near-term driver of financial markets as it would signal how far off a mass vaccination programme actually is.
"It seems very likely that a number of vaccines will be available by the end of this year, but it could take until mid of next year to have enough people vaccinated to be safe to go back to normal. Despite the negative short-term outlook, the market is focusing on the more positive medium-term prospects and risk assets are performing. We would expect this momentum to continue supporting the EUR," says Vamvakidis.
Bank of America economists are expecting a rebound in the euro next year, as the rollout of a vaccine allows a global recovery to gain momentum and risk-seeking extends weakness in the dollar.
"The U.S. dollar outlook depends on the speed of the global economic recovery from the coronavirus pandemic," says Julius Baer's Kohl. "The outlook for stronger growth in 2021 helps in relative terms less domestic-oriented economies like the eurozone at the expense of the U.S."
EUR/USD Forecasts 2021
Period: Q2 2021 Onwards
FX for Businesses Guide
European Central Bank monetary policy and inflows of global investor capital are "factors that will continue to drive the EUR higher, extending a trend already visible in the second half of this year. In addition, European investors could begin to hedge an increasing share of their U.S. dollar exposure, which would drive EUR/USD higher," says Kohl.
However, the euro's upside against the dollar will likely be capped once the U.S. Federal Reserve starts indicating interest rates must start rising once more, in response to the strengthening economy.
Julius Bear raise their 12-month forecast from 1.20 to 1.24 while the three-month forecast is set at 1.20.
Bank of America meanwhile forecast EUR/USD to spend 2021 between its equilibrium range of 1.20-1.25, starting the year at 1.20 and ending it at 1.25.
They assume it will stay at 1.25 in 2022.
"EUR/USD ends the year stronger, despite a much deeper recession in the Eurozone than in the US. Still, it remains somewhat below its equilibrium range of 1.20-1.25," says Athanasios Vamvakidis an analyst at BofA.
Risks to the forecast identified by BofA includes marketing positioning, as it is noted the market is already 'long' EUR/USD - i.e. the trade is already heavily subscribed and would therefore be subject to a swift move lower on any setbacks to the outlook.
Furthermore, having already priced the vaccine, risk assets could "sell the fact".
"The recovery of the global economy next year is highly uncertain and depends a lot on the timing of the vaccine and its distribution and availability to the wide population. Policy risks are also high, with additional US fiscal stimulus in question and the EU Recovery Fund already delayed," says Vamvakidis.